China Unicom shares surge 6.2%

Beijing tells Army to shift mobile assets to Unicom parent

By

VivianChu

HONG KONG (CBS.MW) - Beijing has ordered China’s army to transfer its mobile phone businesses to the China Unicom group, prompting investors to drive the share price of the mainland’s second biggest telecommunications company to new highs Friday.

Shares of China Unicom Ltd. (CHU) surged 6.23 percent to close at 21.30 Hong Kong dollars. Turnover in the stock led the Hong Kong exchange both in trading value and volume.

Unicom’s share price has gained more than 35 percent since its trading debut on June 22.

The order to inject Unicom’s unlisted parent, China Unicom Corp., with the cellular assets of the People's Liberation Army (PLA) was announced by the Ministry of Information Industry at a press conference in Beijing on Thursday. It’s part of an ongoing effort by China’s government to separate the commercial interests of the PLA from its military role.

The PLA has long held extensive business holdings throughout the country, but has been under pressure to divest itself of them after President Jiang Zemin launched a campaign in 1998 to force the military to get out of civilian businesses.

Among the PLA’s mobile-phone assets is a 50-percent stake in a venture jointly owned with the Ministry of Information Industry called Great Wall Communications. The venture, which comprises cellular networks in the cities of Beijing, Shanghai, Xian and Guangzhou, currently has a subscriber base of 200,000.

The transfer of the PLA’s cellular assets will not directly affect the Unicom group’s unit that is listed in Hong Kong and New York. Still, it “almost inevitably will raise the issue of which third-generation mobile standard China will adopt,” noted Richard Ferguson, telecom analyst at Nomura International in Hong Kong.

Moreover, China Unicom has publicly rejected the use of current generation CDMA technology, even though it already has a CDMA license.

What Unicom Group will do with the CDMA network it will inherit from the PLA is uncertain, said Ferguson. “Running an incompatible network of 200,000 subscribers alongside one with has 8 million GSM subscribers may be more trouble than it’s worth,” he said.

However, an injection of the assets into the listed China Unicom vehicle “cannot be ruled out,” he added.

More importantly, the transfer order from Beijing shows that China’s government is trying to boost competition in the domestic telecom sector, which was dominated by China Mobile (CHL) until China Unicom’s listing in June. The task is taking on more urgency as China attempts to create a more level telecommunications playing field before it enters the World Trade Organization later this year.

“This development shows that government support for China Unicom is a reality. They’re actively promoting a number of alternative carriers in China, rather than the interests of China Mobile,” said Ferguson.

As the world's third largest mobile market with 55 million users, China is key to the profitability of companies such as Qualcomm (QCOM ), which pioneered CDMA technology, and European companies including Ericcson (ERICY), which developed the rival GSM standard, as they prepare to roll out the third-generation versions of their respective technologies.

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